Healthcare Tax Exclusion

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Each tax year, after you retire or exit DROP, as a Retired Public Safety Officer, you may be eligible to exclude up to $3,000 from your annual gross income for certain health and insurance premiums that are deducted directly from your monthly pension payments. Health Insurance Premium Reimbursement (HIPR) program participants do not qualify for this tax benefit.

The following is a summary of the rules:

What does the law provide?

The Healthcare Enhancement for Local Public Safety Retirees Act (“HELPS Act”) was enacted in Section 845 of the Pension Protection Act of 2006 (“PPA ‘06″). The HELPS Act added section 402(l) to the Internal Revenue Code (“Code”). Section 402(l) permits certain taxpayers to exclude from their gross income distributions up to $3,000 annually from an eligible governmental plan used to pay qualified health insurance premiums of an eligible retired public safety officer and his or her spouse and dependents. 

Who is a qualified public safety employee for purposes of the exclusion?

All retired Los Angeles firefighters and police officers who retired on or after achieving eligibility for normal retirement or who retired on a disability retirement meet the definition. 

Deferred vested members who left prior to being eligible to retire are not eligible until they have retired from LAFPP. 

If you worked as a police officer or firefighter, but retired from the City in a different employment category, you are not eligible for the exclusion.

In order to be eligible for the exclusion you must have elected to have qualified health insurance premiums deducted from your LAFPP pension and paid directly by LAFPP to the qualified health insurance provider. 

Does it cover only my individual premiums or does it apply to family members?

The retiree can use the exclusion for his or her own premium or for family premiums which also cover a member’s spouse and/or dependent(s). A dependent has to be someone for whom you can take a deduction on your tax return. 

Your individual tax advisor or accountant should be consulted if you have any questions about whether someone qualifies as a dependent.

Is a domestic partner a spouse?

No. A domestic partner is not a spouse. A spouse must be a person to whom you are legally married. 

A domestic partner may be claimed as a dependent if he or she otherwise qualifies as a dependent for tax purposes.  Again, you should consult with your individual tax advisor if you have any questions about this.

If I am legally married to another retired member of the Fire & Police Pension Plan, do we each get to claim a $3,000 deduction?

Yes, each of you may exclude the amount of your individual premiums up to $3,000 per year.

Are there any rules about how the premium is paid?

Yes, LAFPP must pay the premium directly to the provider of the accident or health plan or long-term care insurance coverage. Money paid directly by the retiree does not count. As such, Health Insurance Premium Reimbursement participants do not qualify for this tax benefit.

I heard that I can claim the $3,000 deduction from several plans. Is that true?

No. The total that can be claimed by a retiree for qualified health insurance premiums is the actual amount of the premium(s), up to $3,000 from all sources.

Are qualified surviving spouses and domestic partners eligible to claim the exclusion?

No, the benefit is specific to the retired public safety officer.

Are all insurance plans covered in this program?

No. The coverage is limited to the plans maintained by the City or the employee organizations.

Is the $3,000 a tax deduction or a tax credit when I file my tax return?

It is an exclusion from income. In order to claim the exclusion, you report the amount of total distributions received from LAFPP (from Box 2a of Form 1099-R) on line 5a of your Form 1040, 1040-SR or 1040-NR. Then, you report the taxable amount (reducing for the exclusion) on line 5b of the Form 1040, 1040-SR or 1040-NR and write “PSO” next to the appropriate line on which you report the taxable income. Again, you should consult with your tax advisor if you have any questions about how to properly report the tax exclusion on your federal income tax form.

Can I claim my insurance copays or deductibles I paid during the year as part of the $3,000 healthcare tax exclusion?

No.  The exclusion is specific to accident or health insurance or long-term care insurance premiums directly paid by LAFPP to the insurance provider(s).

Can I include the LAFPP health insurance subsidy amounts as part of the $3,000 healthcare tax exclusion?

No. The amount eligible for exclusion must be a reduction from your monthly pension payment and paid directly by LAFPP to the insurance provider(s). 

Are these rules subject to change?

As with all matters involving federal tax law, the rules under Code Section 402(l) are subject to change by further acts of Congress. LAFPP recognizes that the amount of the exclusion ($3,000) has not been increased by Congress for many years. There have been proposals to increase the amount of the exclusion and/or to allow the exclusion to apply to premiums paid directly by the retiree. LAFPP will update the information provided in this resource if Congress changes the rules for the HELPS Act exclusion.

 

Questions?

If you have any questions, please contact the Medical and Dental Benefits Section at (213) 279-3115, toll-free at (844) 88-LAFPP (52377), or via email at mdb@lafpp.com.